Practice prelim 2 solutions(1)

1 Cornell University School of Hotel Administration Professor Meral Kiefer Lead TA Nicole Chun Lead TA Scott Schechter Student Name Date: HADM 2250-Finance Prelim 2 Spring 2012 You have 1 hour and 15 minutes to complete the exam. You may use a calculator. Calculators are not to be shared during the exam. Please write your name on the exam form and on every page. GRADING (30 total points possible) Section A consists of 15 multiple-choice questions, each worth 3 points. Section B consists of 8 computational questions, each worth 10 points. Please clearly show your work, including calculator inputs , so that we can award partial credit where merited. Please read and sign the following statement: Academic integrity is expected of all students of Cornell University at all times, whether in the presence or absence of members of the faculty. Understanding this, I declare I shall not give, use or receive unauthorized aid in this examination. Signature GOOD LUCK! 2 Section A (15 questions, 3 points each) 1. The internal rate of return is defined as the: A. Maximum rate of return a firm expects to earn on a project B. Rate of return a project will generate if the project in financed solely with internal funds C. Discount rate that equates the net cash inflows of a project to zero. D. Discount rate that causes the net present value of a project to equal zero E. Discount rate that causes the profitability index for a project to equal zero 2. The operating cash flow of a cost cutting project: A. Is equal to the depreciation tax shield B. Is equal to zero because there is no incremental sales C. Can only be analyzed by projecting the sales and costs for the firms entire operations D. Includes any changes that occur in the current accounts E. Can be positive even though there are no sales 3. A company is considering a project with a cash break-even point of 22,600 units. The selling price is $28 a unit, the variable cost per unit is $13, and depreciation is $14,000. What is the projected amount of fixed costs? A. $325,000 B. $339,000 22,600 ($28 - $13) = $339,000 C. $342,000 D. $248,000 E. $353,000 4. Which of the following statements are correct concerning diversifiable risk? I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities II. There is no reward for accepting diversifiable risks III. Diversifiable risks are generally associated with an individual firm or industry IV. Beta measures diversifiable risk A. I and III only B. II and IV only C. I and IV only D. I, II and III only E. I, II, III and IV 2 Section A (15 questions, 3 points each) 1. The internal rate of return is defined as the: A. Maximum rate of return a firm expects to earn on a project B. Rate of return a project will generate if the project in financed solely with internal funds C. Discount rate that equates the net cash inflows of a project to zero. ...
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